Monday, November 03, 2008

Are Real Tuition Increases Declining?

By Richard Vedder

The annual College Board data on tuition charges are out. I have not had a chance to analyze things in detail (this financial crisis is keeping us economists busy), but preliminarily it looks like real tuition increases are continuing, but at a lower rate than in the past. The nominal rate of tuition increase (about 6 percent) is about the same, but because of increased inflation, the real rate of increase in tuition charges is declining.

Historically, tuition charges have risen 2 to 4 percent annually in real terms, while for 2008 it looks like the typical increase is no more than one percent, and probably a bit less. Growing economic uncertainty, falling real wealth, and a stop in the growth of the 18 to 22 year old population are perhaps reducing the growth in demand for higher education relative to supply, slowing down tuition increases in the process. We have blogged in the past weeks about the possibility of a tuition slowdown, a move also made possible in part because of greater public outcry over college costs.

If, as seems likely, the economy continues to be sluggish or worse, I see the possibility that the rate of real tuition increase will fall again next year, possibly to even below zero --meaning actual decline. If so, people will no doubt starting writing articles about the end of tuition price inflation. I am not so sure. The moderation in tuition charges does not reflect any important behavioral shifts on the part of universities, I suspect, but rather a response to temporary adverse macroeconomic conditions.

Moreover, as my associate Andy Gillen always reminds me, what is usually important are net tuition charges, not the sticker price. It is often a little difficult to accurate calculate those net charges (tuitiion minus grant aid) precisely. Rising non-tuition type fees (recreation fees, technology fees, health fees, etc.) seem to be growing in relative importance as well. We know that student loan demand is generally up a good bit, implying a probable real increase in student financial burden.

Real tuition charges are sensitive to the rate of inflation. When inflation rises, nominal tuition charges usually lag behind, so inflation-adjusted tuition fees stay stagnant or even fall --that happened in the 1970s, and again in 2008. Given the huge fiscal stimulus and expansive monetary policies being followed, I think there is a possibility this trend will continue in 2009. Yet I testified at a congressional hearing last Thursday (being run on CSPAN a number of times) where a witness argued the opposite --that we face the specter of deflation, which almost certainly would enhance real tuition increases. Who is right? Time will tell. The last year the Consumer Price Index fell was 1955, so I am not holding my breath on a surge in deflationary pressures, recession or no recession (indeed, if you believe in the Monetary Equation of Exchange, lower output should INCREASE inflation).

One thing is at work that lowers the rate of increase in the true average cost of college, something not probably revealed by the College Board statistics. There seems to be a bit of a shift away from expensive schools to less expensive ones. To be sure, enrollment at the Harvards of the world are holding constant, but there may be some shifting between non-selective four year public schools towards less expensive two year ones. I am getting vibes in Ohio that this is going on (although even four year enrollments are up a bit as poor job opportunities are driving some potential workers to go to school). It will be interesting to see what enrollments are this fall at the expensive but non-selective private schools that have middling rankings --I expect them to suffer from the downturn, although maybe not until next year.

I suspect the time is right for a new low cost education model. Vance Fried has suggested one in a CCAP study, arguing that a quality education is doable for well under $10,000 tuition a year. If publicly subsidized, that might translate to an out-of-pocket cost to students of, say, $5,000 a year. More and more students are taking Internet courses that, I would think, could be offered by an educational Wal-Mart type operation for that price or even less. The idea of an open source or Wikipedia University operating at extremely low cost is technologically feasible; can someone harness the idea and make it work? Don't underestimate American ingenuity, even in periods of pessimism and gloom in the broader American economy.